Disruptive Innovation: The Challenge and the Solution

By Marco Annunziata

The Chief Economist of General Electric discusses the challenge and solution of disruptive innovation.

THE RELATIONSHIP BETWEEN MINDS and machines lies at the very heart of innovation, and its history has brought fundamental disruptions to the global economy. To date, this relationship has had three key stages — the third of which is unfolding today. The first stage came when we introduced powerful tools to help with agricultural work. Until then, agriculture had been the pillar of economic growth; suddenly, machines could be used to reduce workload. The second stage was the Industrial Revolution, which saw the introduction of even more powerful machines and the expansion of industry, with successive waves of automation. That phase was similar to the first, in that we were again using machines to unburden us from some of the hardest and most tedious tasks that humans were performing. While the introduction of machines to agriculture was important, it was the Industrial Revolution that really kicked off the process of productivity growth, and with it, exponential improvements in standards of living.

We have now evolved to a third stage, in which we are learning to use machines to help us perform better in the areas of intelligence and information. It is no longer just about using machines to unburden ourselves from physical tasks: it is about taking advantage of the fact that they can perform a larger number of tasks with greater precision and speed than humans.

The relationship between minds and machines has always been fraught with contradictions — featuring elements of hope mixed with fear. We love to use machines to do things that we don’t like to do, but at the same time, we have an instinctive fear that they might somehow replace us, or not work in our interest. These concerns were probably less important during the first wave of mind-machine interaction — but we saw them very clearly in the Industrial Revolution. In both cases, however, no one was yet making comparisons between the mind and the machine. The demarcation line between the two was very clear.

With the current wave of mind-machine interaction, this line is becoming, to some extent, blurred. With the development of Big Data mining, robotics and artificial intelligence, we are looking at the possibility of machines taking over a number of intellectual tasks, which is leading people to ask complicated questions such as, ‘What exactly makes humans special?’ This is not just a philosophical question, it is an economic one, because it amounts to asking, ‘What is the best division of labour between minds and machines?’

In my view, the economic potential of this new phase has been under-estimated, in part because we are just at the beginning of it, and in part because we are coming out of the healing process after a long global financial crisis and recession. There is still a sense of pessimism in the market, with most people believing that growth is still weak and that there isn’t much industrial economic opportunity coming from the emerging relationship between minds and machines.

The economic potential of this new phase of mind-machine interaction has been under-estimated.

I view things quite differently: once you start making industrial machines and supply chains more intelligent through data and sensors, what you get is a more productive economy, leading to more jobs and economic growth. These productivity gains, in a sense, are not dissimilar to the second evolutionary wave. The difference is, we will soon have software that helps us predict when and what will go wrong with any piece of equipment, when and where to intervene before an outage occurs, how to plan around it, and eventually, how to eliminate outages or stoppages in production altogether.

On top of having humans learning to leverage the computing power of machines, we are also now leveraging the ability that arises when machines put humans into contact with each other. In terms of software development, this has been going on for a while, but when you look at industry, we have only been dipping our toes in the water so far. I believe this will accelerate over the next 20 to 30 years, with business and governments exploring strategies and incentive structures for people to cooperate in ways that reward open innovation while safeguarding intellectual property.

Yet another aspect of enhanced mind-machine interaction is progress in advanced manufacturing techniques. These techniques allow you — and by you I mean the engineer, the innovator, the thinking brain — to start figuring out completely new products that are ‘smart by design’ — rather than being smartened by having sensors added on top of them. This is another area where we will see enormous progress over the next 20 years, and the most promising area of impact will likely be healthcare.

One tipping point here is whether or not we will reach a stage where concerns over artificially-engineering human capacities become so strong that they force policymakers and businesses to turn research the other way. This will be a critical moment because, in a sense, it represents the other side of the blurry line — where our minds become more like machines.

Against this backdrop, in January, GE released its biannual Global Innovation Barometer (GIB), which explores how business leaders around the world see innovation, and how their views are shaping their strategies. The GIB is now in its fifth edition, spanning 23 countries. This year, we spoke to 2,748 business executives, of which 1,915 were from the C-suite. All were responsible for making decisions related to innovation, product development or research and development activities. We also spoke to 1,346 ‘informed citizens’ with university education or above, who regularly consume top-tier business-news publications and follow public policy matters.

Overall, the latest GIB indicates much greater optimism regarding innovation than we have seen in the past: some two-thirds of both business executives and the informed public believe that the digital-industrial revolution will have a positive impact on the economy and on society. Optimism is particularly strong in countries where economic growth already benefits from technology — especially those in Asia.

On balance, emerging markets are much more positive and enthusiastic than advanced economies. To me, this makes sense , because digital innovations can help these markets bypass weaknesses in their infrastructure and institutions, enabling them to leapfrog quickly to new technologies. Interestingly, this optimism is starkly at odds with the negative tone of most headlines in the global financial press. What has made people so optimistic? Here is my theory: first, the economy is actually doing much better than headlines suggest. Global growth is proceeding at a healthy pace, and the U.S. is back to full employment. Second, digital-industrial innovation is already taking place, and it is not destroying jobs; people see that, and as a result, many of them no longer buy into the techno-phobic narrative.

So, which country is the best at innovation right now? This year, the U.S. still led the league tables; Japan was second — and faced with slow growth and adverse demographics, it is redoubling its digital innovation efforts. Germany and China were very close behind, with business leaders ranking Germany number three, while the public gave China the edge. Having China in the top four does not jive with the stories we read in the newspapers — about how China’s economy is grinding to a halt because they have exhausted their model of low-cost manufacturing. But what I see on the ground tells me the GIB has it right: China is already an innovation power to be reckoned with.

Make no mistake: jobs will change, and new skills will be required. Following are the top five key takeaways from this year’s Global Innovation Barometer.

Minds and machines will increasingly work together;

Creativity and problem-solving are the top two skills for the workforce of the future;

The ROI on collaborative initiatives between organizations will continue to increase;

Emerging markets are significantly more fearless than others in embracing innovation; and

There is a call for greater government support to break down barriers to innovation.

Let’s take a closer look at each.

MINDS AND MACHINES WORKING TOGETHER.

Perhaps surprisingly, few respondents feared any negative impact on employment as a result of the digital revolution: only 17 per cent of executives and 15 per cent of citizens foresaw negative impact. Indeed, executives expect that the digital revolution will make the workplace safer (43 per cent) and create higher-value roles for workers (48 per cent). Executives in the U.S., India, China and Germany anticipate a positive outcome for their country, while Japanese, French and Swedish executives were a bit more skeptical. What if technology evolves faster than businesses can adapt? The vast majority (81 per cent) of executives are mindful of the risk of ‘digital Darwinism’, or fear of becoming obsolete (FOBO). Only 24 per cent felt their company is ‘performing very well’ at quickly adapting and implementing emerging technologies.

THE IMPORTANCE OF CREATIVITY AND PROBLEM-SOLVING SKILLS.

In terms of the skills required for the years ahead, the GIB shows that creativity and problem-solving skills were most important to executives, followed by interpersonal skills. Workers with these skills will be in very high demand, and as a result, talent acquisition will remain a key determinant of corporate success and the primary success factor in terms of innovation. The catch is that our education system is not widely prepared to train for these in-demand skills. Barely half of our respondents said that their education systems are up to the task. Asian countries were the most confident — and indeed their education systems tend to place a stronger emphasis on science, technology, mathematics and engineering (STEM).

THE ROI ON COLLABORATION IS INCREASING.

Collaborative innovation has increased in most markets, and revenue and profit generated by it has grown over the last two years: 77 per cent of executives (up from 64 per cent in the previous GIB) said that revenue and profit generated via collaborative activity has yielded improved financial results for their organization. Furthermore, 68 per cent of executives declared that their firm is ‘open to the risk-sharing associated with innovation’, including revenue streams or losses that could be generated through collaborative initiatives. So, leaders are more willing to share both the gains and risks of collaborating, and they are seeing growing results: 77 per cent have increased revenue and profit through collaborative innovation in the last two years — up from 64 per cent in 2014. Interestingly, the biggest increase in collaboration has been amongst smaller businesses.

EMERGING MARKETS FEARLESSLY EMBRACE INNOVATION.

Executives from emerging markets appear to be feeling more optimistic and empowered by the Fourth Industrial Revolution than their peers in developing economies. Asian markets are amongst the most excited and confident, while informed citizens in developed markets are feeling the least in control.

A CALL FOR GREATER GOVERNMENT SUPPORT.

While most respondents believed that the private sector is firmly in the driver’s seat with respect to innovation, executives and citizens alike called for public authorities to play a more supportive role. Few citizens (12 per cent) believed their government was ‘the top driver of innovation’ in their country, but significantly more (30 per cent) said that it should be. More than half (57 per cent) indicated that their country’s regulations are ‘not supportive of innovative companies’ — although emerging markets were more positive in their assessment. Most executives agreed that data and privacy regulations were preventing more radical innovation by businesses, while the majority of citizens (64 per cent) indicated they are willing to share access to their data, if it would lead to better service.

There was general agreement (90 per cent) among executives and citizens alike that the most innovative companies are not those who launch new products and services — but those who create new markets that did not previously exist. Being disruptive has become the gold standard for businesses, and as a result, 81 per cent of executives agreed that ‘embracing a start-up ethos’ is becoming the norm.

While they clearly recognize the need to innovate radically in order to keep up, most business leaders continue to favour a ‘safer’ approach: for most respondents, incremental innovation still drives the bottom line, particularly in developed markets. When asked, ‘In the past few years, what kind of innovation has contributed the most to your company’s performance?’, 58 per cent said they are ‘focused on maximizing performance of existing revenue streams and business models’. Their goal: to protect their core business as much as possible, so that it continues to generate the profitability needed to support research and innovation efforts. So, leaders know that disruptive innovation is the winning card, yet they are struggling with it and reverting to incremental innovation — and this leaves them anxious.

However, emerging markets — particularly in Asia — are embracing radical innovation and seeking opportunities to leapfrog. Their goal: to bring innovative products and/or services to market as quickly as possible, without worrying about the short-term impact it might have on the core business. As a result, we can expect to see companies investing more effort and resources in fostering disruptive innovation, focusing on the elements highlighted above: a talented and flexible workforce, speed, and more and smarter risk-taking.

Why aren’t businesses innovating more effectively? The informed public thinks internal inertia and a lack of leadership are the culprits, while executives blame ineffective business models. The top three best practices identified by both groups were:

Having a clear process and structure in place to manage innovation;

Encouraging and rewarding innovative people; and

Creating a connected culture where idea sharing is facilitated and contributing parties are recognized.

In closing

In the midst of this third wave of mind-machine interation, GE’s 2016 Global Innovation Barometer confirms two things: that the digital-industrial revolution is very real; and that it is well underway. My colleagues and I firmly believe that innovation will create new and better job opportunities, across industries. The workforce, though, will need to go through a significant transformation, because as indicated, the jobs of the future will demand well-developed problemsolving abilities and creativity. Education and training need to catch up — and fast.

Dr. Marco Annunziata is Chief Economist and Executive Director of Global Market Insight at GE, based in New York City.
He is the author of The Economics of the Financial Crisis: Lessons and New Threats (Palgrave MacMillan, 2011).